What my peers are letting me get away with

I’m a bit frustrated because I probably won’t be able to do much blogging for the next few weeks, and yet I have a large backlog of issues I’d like to address.  I guess the big news today is Paul Krugman’s very generous comments on David Beckworth and I (and by implication the others who have also been pushing the nominal GDP target):

“Market monetarists” like Scott Sumner and David Beckworth are crowing about the new respectability of nominal GDP targeting. And they have a right to be happy.

.   .   .

At this point, however, we seem to have a broad convergence. As I read them, the market monetarists have largely moved to an expectations view. And now that we’re almost four years into the Lesser Depression, I’m willing, out of a combination of a sense that support is building for a Fed regime shift and sheer desperation, to support the use of expectations-based monetary policy as our best hope.

And one thing the market monetarists may have been right about is the usefulness of focusing on nominal GDP. As far as I can see,the underlying economics is about expected inflation; but stating the goal in terms of nominal GDP may nonetheless be a good idea, largely as a selling point, since it (a) is easier to make the case that we’ve fallen far below where we should be and (b) doesn’t sound so scary and anti-social.

I still believe that the chances of success will be a lot larger if we have expansionary fiscal policy too; but by all means let’s try whatever we can.

That makes me want to take back all the negative Krugman posts I wrote.  (Although in fairness, I often called him “brilliant,” and on one occasion argued we’d be much better off if the FOMC had 12 Paul Krugman clones.  But I suppose his supporters have noticed the negatives more than the positives.) 

I still don’t think I ever denied that the expectations channel was crucial, although I don’t doubt I wrote a couple posts that may have created that impression.  But I would like to briefly address his comment about inflation being the theoretically appropriate variable.  He may well be right, as I don’t have a magic bullet argument against the mainstream view, but I’ll list a few of my pragmatic arguments:

The mainstream view is that P and Y (prices and output) are the “things” in and of themselves, and P*Y is an ungainly mixture, like a centaur.  It treats P and Y equally, even though macro models provide no reason for doing so.  So what are my pragmatic arguments?

1.  I’ll start with a point I’ve often made, and others like Greg Mankiw have also made.  The price index that should be stabilized in the one with sticky prices.  To me that means a wage index.  Earl Thompson argued for the optimality of wage targeting back in the 1970s, and I continue to see average nominal wages fall when NGDP growth falls sharply.  In contrast, the CPI is not a very reliable indicator of excessive monetary tightness, as it’s full of all sorts of flaws.  Core CPI does better, but only because it’s much closer to wages.  I see NGDP as a sort of proxy for nominal wages.

2.  It’s widely thought that low inflation leads to liquidity traps, but the evidence from Japan, China, etc, suggests it’s actually low NGDP growth that leads to liquidity traps.  Both had deflation in the late 1990s, but only Japan had low NGDP growth.

3.  Inflation appears in many new Keynesian models as a variable used to calculate real interest rates, which then impact AD.  But arguably it is the difference between nominal interest rates and nominal GDP growth that is more important.  Suppose the SRAS is really flat, so inflation doesn’t rise much with rapid NGDP growth.  I believe that if the Fed is able to engineer rapid expected NGDP growth, and nominal rates stay low, that will lead to more investment, even if the real rate doesn’t drop much (because of the flat SRAS.)  I think some Keynesians would counter that since you can’t raise inflation substantially without enormous increases in NGDP growth increases (when SRAS is fairly flat), a modest boost in expected NGDP growth is virtually impossible.  There’s a sort of “gap” where it’s 1.5% core inflation or 4%, but nothing in between.  I think that ignores the fact that monetary policy doesn’t just affect bond yields; it affects the prices of all sorts of assets such as stocks, commodities, commercial real estate, etc, relative to sticky nominal wages.  (That’s where my monetarism comes in.)  Maybe that’s saying that the “right” price index would include assets.  But stock bubbles (i.e. 1987) can give off false signals–so I still prefer NGDP.  So replace P and Y with NGDP and hours worked.

4.  I also don’t like inflation because I don’t believe the inflation numbers we use correspond to the theoretical concept in NK models.  The government says housing costs are up 7.7% in 5 years, Case-Shiller says they are down 32%.   Which number best expresses the incentives facing home builders to construct new homes?   The Case-Shiller number is actual transaction prices; the BLS number is rental equivalent.  Older rental contracts aren’t really prices at all; they are a sort of nominal debt. 

5.  When using inflation in your model you need to add supply shocks, as higher inflation is only expansionary if it comes from the demand-side.  NGDP takes care of that problem—it’s unambiguously demand.

6.  There are no solid theoretical foundations for price level theory in a modern economy where hedonics is very important.  It’s not just that we’re not good at measuring price changes for computers and consulting services; it’s not even clear what we are trying to measure in theory.  Is “a computer” something that yields constant utility?  If so, then we need to figure out what utility is.  If it’s happiness, and if that’s the theoretical foundation for price level theory, then it means the inflation rate measures the wage increase required to preserve the current level of happiness.  In that case, if surveys show people aren’t getting any happier over the decades, then that means RGDP/person is constant.  But that’s nonsense.  How can inflation be the “theoretically” appropriate variable for these models, if there’s no obvious way to partition computers into prices and output?  The only objective fact is the revenue Dell earns from selling computers; the “quantity” is purely arbitrary.

7.   Because of point 6, I’m inclined to argue that average hourly wages are the only reasonably objective nominal aggregate that measures a sort of “inflation” (albeit input price inflation.)   Yes, total aggregate hours is a bit fuzzy, due to the non-market economy.  But the market sector is reasonably well-defined, and gives us something tangible to work with.   Set monetary policy to keep average hourly wages growing at a steady rate of 4%, and we’ll be OK.  So why don’t I favor a wage target?  I’m not sure how comprehensive the wage data actually is, and I also don’t think it’s politically feasible to target wages.  It would seem too much like the Fed is trying to hold down wages, which seems unfair.  (Even though in theory CEO incomes are also “wages.”)

These arguments are pragmatic, and I could add the one that Krugman alludes to; it’s easier for the Fed to sell a policy that raises the incomes of Americans than one that raises their cost of living.  It’s also more honest, as the Fed really is trying to raise NGDP, not pure inflation.  That’s been the argument I’ve used more and more often, and indeed I think right now it’s the most powerful argument. 

These arguments are all pragmatic, and a few are probably wrong.  I doubt that any would cause Krugman to abandon his theoretical framework with its Ps and Ys.  But I’m now pretty much a total pragmatist; I no longer believe “inflation” is an actual thing out there in the world, waiting for us to measure it more or less accurately.  A famous philosophical pragmatist named Richard Rorty supposed said “truth is what my peers let me get away with saying.”  I’d say that right now more and more of my peers are seeing the practical virtues of NGDP targeting.   (BTW, almost everyone misunderstood Rorty’s comment.) 

PS.  Let’s also recall the long and distinguished intellectual tradition of NGDP targeting proposals:  Hawtrey, Hayek, McCallum, Taylor, Mankiw, Selgin, and many others.

PPS.  Unfortunately, my responses to comments will fall way behind, as I’ll be travelling, then grading.

PPPS.  Message to any smart grad students reading this blog:  I’m providing the intuition—I’m counting on you to turn it into a rigorous mathematical model that my peers will take seriously.


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100 Responses to “What my peers are letting me get away with”

  1. Gravatar of Cthorm Cthorm
    19. October 2011 at 15:37

    “PS. Let’s also recall the long and distinguished intellectual tradition of NGDP targeting proposals: Hawtrey, Hayek, McCallum, Taylor, Mankiw, Selgin, and many others.”

    I know you said “many others” but I’m really surprised that you didn’t include Friedman in that list. As far as I know he is the progenitor of the idea of targeting stable monetary growth. I have no doubt that if he were still around he would be backing the idea of NGDP targeting with great furor.

    In “Free to Choose” he even goes so far as to say his ideal Fed would be one that “responds automatically in a rule-based way” – one of his common criticisms of Socialists was that their system, even assuming pure intentions, was bad because it relied on “the right person” being in charge.

  2. Gravatar of Daniel Daniel
    19. October 2011 at 15:39

    “PPPS. Message to any smart grad students reading this blog: I’m providing the intuition—I’m counting on you to turn it into a rigorous mathematical model that my peers will take seriously.”

    Roger that

  3. Gravatar of John hall John hall
    19. October 2011 at 16:07

    Does the world really need a DSGE model for this?

    Not a grad student, but I have some ideas. I care more about a framework of thinking about things than a mathematical model, per se. Also, there’s a 100,000 prize on financial papers from AQR, so that’s got my attention.

  4. Gravatar of Integral Integral
    19. October 2011 at 16:17

    “PPPS. Message to any smart grad students reading this blog: I’m providing the intuition—I’m counting on you to turn it into a rigorous mathematical model that my peers will take seriously.”

    Working on it, but it’ll have to wait until after the monetary economics comp. :)

  5. Gravatar of Rob Rob
    19. October 2011 at 16:21

    Would it be an oversimplification to say that the reason that Krugman is still focusing on inflation (and is apparently willing to accept talk about NGDP only for tactical reasons) is because he , as a Keynsian, sees AD as being increased only via lowering interest rates (and real interest rates can be lowered further only with higher inflation) while Market Monetarists see increases in the money supply shifting AD directly and for them inflation would be just a side-effect ?

  6. Gravatar of Cameron Cameron
    19. October 2011 at 16:26

    Great to see that you are finally getting the attention you deserve. Keep at it.

  7. Gravatar of Mike Sandifer Mike Sandifer
    19. October 2011 at 16:33

    Congrats Scott. Your “unnatural” blogging isn’t in vain.

  8. Gravatar of Morgan Warstler Morgan Warstler
    19. October 2011 at 16:37

    Dear Grad students, start here….

    RDGP since 1999:

    http://www.indexmundi.com/g/g.aspx?c=us&v=66

    CPI cine since 1999:

    http://www.indexmundi.com/g/g.aspx?v=71&c=us&l=en

    Question #1: If we had a level target of 5% NGDP, what would the Fed be doing today to get level?

    Question #2: If we had a level target of 3% NGDP, how much lower would the price level be?

  9. Gravatar of Nick Rowe Nick Rowe
    19. October 2011 at 16:52

    You’re on a roll Scott. Well done.

  10. Gravatar of Scott Sumner Scott Sumner
    19. October 2011 at 17:17

    Cthorm, Friedman had a huge influence on the way I developed my ideas on monetary policy.

    Daniel and Integral. Go for it.

    John, That’s a big prize. And I don’t even know what AQR standards for. Accounting Quarterly Review?

    Rob, Maybe, I’d put it this way. He sees interest rates (real) as the key transmission mechanism, and we look at NGDP expectations and asset prices as well. Admittedly asset prices sort of contain an embedded interest rate, but they don’t have the zero bound problem.

    Also, I am pretty sure the that nominal i-rates minus NGDP growth variable I talked about is the sum of two variables that appear in NK models; real rates and some sort of real growth term that relates to shifts in the IS curve (assuming real rates are on the vertical axis.) But that’s just a guess.

    Morgan, Start 3% NGDP growth from 2008, and we’re way below target. That’s how you sell it to the Tea Party.

    Thanks Cameron and Mike and Nick.

    Nick, I loved the Chuck Norris post.

  11. Gravatar of Benjamin Cole Benjamin Cole
    19. October 2011 at 18:05

    Congrats to Sumner, Beckworth, Lars, Glasner, Hendrickson and others.

    Krugman and DeLong have now tipped their hats to NGDP.

    Next stop: Ben Bernanke.

    Go Market Monetarists, go!

  12. Gravatar of JimP JimP
    19. October 2011 at 18:34

    Yes – next stop Bernanke.

    But one has to believe that he believes that the Republicans would try to impeach him –

    But I also think a rising stock market and general optimism would quash that thought flat. I don’t think an impeachment attempt would work.

    Save for Ron Paul and ZeroHedge. Folks like that really do want a depression.

  13. Gravatar of Pete Pete
    19. October 2011 at 18:40

    You’ve probably addressed this at some point, but doesn’t the possibility that a Republican president will either fire or fail to reappoint Bernanke undermine any attempt on his part to drastically change expectations?

  14. Gravatar of JimP JimP
    19. October 2011 at 18:45

    Wow

    http://www.businessinsider.com/goldman-ngdp-targeting-sweden-style-2011-10?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+businessinsider+%28Business+Insider%29

    A second Goldman paper on targeting.

    Clearly this is not just a single analyst from some big firm – this is a corporate effort from the biggest firm on the street. This might actually go somewhere. Goldman does tend to be able to get what they want.

  15. Gravatar of Bob Murphy Bob Murphy
    19. October 2011 at 19:00

    Once again, congrats Scott. I’m glad to have witnessed the triumph of an idea that struck many people as crazy in the beginning. I still disagree with you, but it was really neat to watch this unfold.

  16. Gravatar of JimP JimP
    19. October 2011 at 19:14

    I mean – Bill Dudley is the President of the NY Fed – second only to Bernanke in influence. He worked at Goldman for many years – as chief economist I think. Isn’t that what Hatzius is now? Not sure.

    Perhaps someone from Goldman has whispered into Dudley’s ear and he can now have a little chat with Ben.

    Or perhaps Dudley and Ben had a chat with Goldman and Goldman is preparing the way. Either one would do.

  17. Gravatar of Morgan Warstler Morgan Warstler
    19. October 2011 at 19:20

    Scott, this is completely illogical:

    “Morgan, Start 3% NGDP growth from 2008, and we’re way below target. That’s how you sell it to the Tea Party.”

    Take it back to 1999, take it back to 1980…

    It has to stand on its own legs, there is nothing magical about 2008, the LOGIC says we were do for a serious correction.

    Again, you’ll never get 3% from 2008, you could easily have it from 2012 (so figure your own personal risk / reward)…

    But be sure, at the end of this discussion, progressives either have LESS in their pile, less arrows in their quiver, or it doesn’t happen.

    The moment of Zen, is when we are BUTTING UP AGAINST 3%, and we feel compelled to fire public employees so that we have room for more printing.

    Don’t think you have to bribe liberals with with a distant starting point, they have a serious comeuppance that will make htem move even further our way.

    Bank on it.

    Don’t bet against the hegemony.

  18. Gravatar of Federico S Federico S
    19. October 2011 at 19:20

    Scott, can you clarify your point 2? You’ve argued a number of times that liquidity traps are impossible because a CB has never failed to debase their currency, provided they actually want to. What do you mean by liquidity trap then, or are you admitting to some other version of a liquidity trap?

  19. Gravatar of JimP JimP
    19. October 2011 at 19:43

    “never failed to debase their currency” charming

    Federico – you could get a job as a Republican.

  20. Gravatar of tim tim
    19. October 2011 at 20:26

    I don’t pretend to understand monetary economics as much as most people on this blog. I’m a finance student, with a side interest in monetary policy.
    I still think that even if the only financial asset was “bonds” and there was one “rate of interest”, monetarism would still hold. The problem with Keynesian economics and the ISLM was the separation of the goods and bonds market. So even if you have ultra low interest rates, people would be more likely to adjust their excess cash balances through the goods market. As this would raise P and Y, interest rates would increase as well, so velocity would increase and this would reinforce the higher M.
    Another thing which is annoying me is the old money supply/demand diagram with M/P on the x axis and i on the Y axis. I still think in terms of this diagram when i think of monetary policy. What I would like to see is a diagram which incorporates NGDP as well as the returns on assets other than money (including interest rates), if that makes sense.
    Hopefully in a few years, krugman, bernanke and nearly every other macro economist will say “we are all sumnerites now”. or sumnerians, whichever sounds better.

  21. Gravatar of Fed Up Fed Up
    19. October 2011 at 21:06

    “Set monetary policy to keep average hourly wages growing at a steady rate of 4%, and we’ll be OK. So why don’t I favor a wage target? I’m not sure how comprehensive the wage data actually is, and I also don’t think it’s politically feasible to target wages. It would seem too much like the Fed is trying to hold down wages, which seems unfair. (Even though in theory CEO incomes are also “wages.”)”

    It seems to me this is exactly what the fed has been doing (holding down worker wages but not CEO and banker wages). Whenever average hourly wages get to about 3%, they raise interest rates to lower real AD. Have you ever read the fed minutes where they talk about breaking the air traffic controllers back in the 1980′s?

    Also, what would be wrong with 2% price inflation and 4% to 6% average hourly wage growth?

    IMO, you better clarify what you mean with NGDP because most “people” are going to use it as an excuse for 3% to 6% price inflation and average hourly wages of 2% or below (negative real earnings growth with debt to make up the difference so corporations can be wildly profitable).

    Plus, I want a clarification because I seem to remember you wanting negative real earnings growth on workers.

  22. Gravatar of Ben Crain Ben Crain
    19. October 2011 at 22:01

    I stopped reading this blog at an early point. Not that I disagreed with the direction it seemed to be going. That’s irrelevant to my point. Monetary Policy is Important. Economic Policy is Important. And I have a high regard for/interest in the views on these subjects offered in this blog.

    But there’s one thing I WILL NOT COUNTENANCE, EXCUSE, OVERLOOK. Bad grammar. Bad English. There are, in life, Standards. We would be spared much grief, in every endeavor, if Standards were upheld. I submit that this post commits a foul assault on grammar, a stench unto my nostrils. Mr. Summer writes:

    “on David Beckworth and I”

    Did I read that wrong? No, I double-checked the blog, as it appears on my screen. Does not reading that — or hearing it — make your skin crawl? Like fingernails on a blackboard?

    Why have we come to this? A PhD from the U. of Chicago doesn’t know that “on” requires “me”. “I” is the subject of something. “Me” is the object of something. “On” requires an object. You don’t need to know the grammar rules. You just have to have an ear attuned to correct usage. Where has that ear gone? I have it — at least I think I do — without extensive grounding in English grammar. (Though, admittedly, I developed a keen sense of grammar as such, thru high school Latin, and considerable study of German.) I have it — I think I do — because my parents, my culture, spoke correctly, when I was growing up. Hey, I’m old-fashioned. I graduated from high school in 1960. In a small town in the south (where, by-the-way, I got a very thorough grounding in English and Math.) And I busted my butt learning German grammar, to study at a German university. And now I’m appalled. My own daughter, a graduate of the finest private schools in Wash DC, constantly makes the same mistake that Herr Summer commits: she’ll say something like “they gave it to you and I”. I’ve become a pain-in-the-ass for everyone I encounter, because I just won’t put up with that shit. Or, to paraphrase Winston Churchill, that is shit “up with which I will not put”!

    I’ve given up fighting a rear guard action against the mournful loss of the subjunctive, in everyday English. It wounds my soul to witness its demise, but I’ve concluded that rescuing it is a lost cause. But I won’t give up on “with I”! That’s just barbaric. Yeah, maybe Mr. Summer is right that the Fed ought to target NGDP. But I’ll not give his argument the time of day until he straightens out his grammar. Look, I mean, some things are important (monetary policy, the Fed, the future of the country), but some other things are REALLY IMPORTANT!

  23. Gravatar of John hall John hall
    19. October 2011 at 22:06

    http://www.aqr.com/

  24. Gravatar of Eric Morey Eric Morey
    20. October 2011 at 00:31

    Morgan,

    2008 (or if you like 2007) is important because that is when RGDP went off the long term trend. You can call it magic if you want, but using a baseline that starts after the inflection point puts you way off pace compared to starting prior to the inflection.

    See:
    http://visualizingeconomics.com/2010/11/03/us-gdp-1871-2009/
    and
    http://visualizingeconomics.com/2010/11/04/log-scale-long-term-real-growth-in-us-gdp-1871-2009/

  25. Gravatar of Morgan Warstler Morgan Warstler
    20. October 2011 at 02:23

    Ben, you are funny.

  26. Gravatar of Jeff Jeff
    20. October 2011 at 03:53

    Ben,

    That is an impertinence up with which we shall not put!

  27. Gravatar of Blue Aurora Blue Aurora
    20. October 2011 at 04:09

    Wow! I didn’t expect a response from you Scott, given the level of busyness you have to deal with!

    Econophysics is essentially statistical mechanics applied to finance and economics. Some famous econophysicists include Joseph L. McCauley, Rosario N. Mantegna, H. Eugene Stanley, Didier Sornette, and Jean-Phillippe Bouchaud.

    I recommend reading this book by Joseph L. McCauley for more information on the econophysicists.

    http://www.amazon.com/Dynamics-Markets-New-Financial-Economics/dp/0521429625/

    The econophysics movement ought to be paid attention to by Austrians, monetarists, neoclassical thinkers, Keynesians, and all stripes.

  28. Gravatar of mb mb
    20. October 2011 at 04:16

    Friedman did have at least one comment on NGDP targeting, which I witnessed (circa 1990). At the time, Bob Parry, then President of the SF Fed, was attempting to articulate his support of the idea (older folks may recall it had a brief hey-day in the late 80s as a result of the work by Meltzer, McCallum and the famous P-star paper). The audience was a small gathering of Fed economists and academics and Friedman was in attendance. The general substantive point, for the purpose below, was that the Fed should attempt to sustain a path of six percent growth for NGDP (based on a three percent trend for real output and three percent inflation).

    After Parry had finished his remarks, Friedman asked the first question. It went something like this: “Bob, what do you do if you’re on path but you have seven percent inflation and minus one percent on output? Ease policy or tighten it?”

    Parry attempted numerous responses and Friedman followed each with another question. It was not pretty and any observer of the exchange would have been hard-pressed to conclude that Friedman was in favor of NGDP targeting (unless this Socratic dialogue had been intended merely to help Parry sharpen his arguments). And the question always has remained for any practical implementation of this approach to monetary policy: If faced with this set of economic conditions, does the central banker (a) ease, (b) tighten or (c) do nothing because he is exactly on the designated target path?

  29. Gravatar of MMJ MMJ
    20. October 2011 at 04:29

    @ Scott –

    why 2008 as the base year? i’m with morgan – there has to be some logic to the choice, and i’m sure different base years will have radically different implications for policy.

    also, “it’s actually low NGDP growth that leads to liquidity traps”. so why wasn’t there a liquidity trap in the european countries that had low NGDP growth? e.g. germany in the early 2000s.

  30. Gravatar of Marcelo Marcelo
    20. October 2011 at 04:49

    Scott,

    I just wanted to add to the congratulations. You have revived an important intellectual theory, and there is a good chance that you could have a great impact on macroeconomic history. Keep it up!

  31. Gravatar of Rafael Rafael
    20. October 2011 at 05:51

    Hey Scott,

    How does it fell to beat Krugman?

  32. Gravatar of Neal Neal
    20. October 2011 at 05:58

    “But I’m now pretty much a total pragmatist; I no longer believe “inflation” is an actual thing out there in the world, waiting for us to measure it more or less accurately.”

    Hahah, ‘quantum economics.’ Reality is what you observe. “Inflation”, “real GDP”, “Price”, and so forth are all models trying to describe observations.

    PS- Any econ grad students want a math coauthor?

  33. Gravatar of Morgan Warstler Morgan Warstler
    20. October 2011 at 07:37

    mb,

    jesus I wish you’d banged this drum earlier. Because this is the stuff I’ve been trying to push everyone to for a long time, and Friedman saying it would have gotten a real discussion.

    Eric,

    you are going apples and oranges as Herman says.

    The REAL discussion here is:

    1. At a 5% level target that we followed from 1999 or 1980 or 1940, we’d RIGHT NOW today be going through the kind of correction we are going through EXCEPT the Fed would have RAISED RATES long ago.

    You HAVE to be able to make the argument about which booms would have been pissed on in the past, or Scott’s argument doesn’t hold.

    2. If you want to argue somehow 2008 was special, I’m going to make the argument that we’re only going to do 3% level, and maybe we’ll set it back to Q1 of 2011.

    Basically, Scott’s not gong to buy you some inflation without the corresponding agreement that from now on we run tighter than before.

    And when I say tighter than before that means AND SCOTT HAS AGREED: we’ll hit the top boundary and suddenly firing public employees actually makes sense – because it unsticks wages, and reduces RGDP, and allows us to HAVE MORE GROWTH without raising rates.

    Eric, you are a liberal, so I’m asking you to really think through this argument…

    When we are suddenly touching the “rates rates” moment, at that moment, we don’t have t raise rates IF we cut public employees.

    You do get that this choice will become very clear in the near future right?

  34. Gravatar of Cthorm Cthorm
    20. October 2011 at 08:28

    ‘When we are suddenly touching the “rates rates” moment, at that moment, we don’t have t raise rates IF we cut public employees.’

    Morgan, I don’t disagree but you are jumping from point 1 to point 3 here. When we reach the point that we are overshooting the NGDP target, we’d have to choose between *cutting the price level* and *cutting government spending*. That’s as close as you can get to the idea of government crowding out private spending. Now this is the part where the logical conclusion is your point: the best way to cut government spending is to make it be more productive, i.e. do the same/more with LESS. Right now the lowest hanging fruit is reducing public sector employment or wages/benefits.

    To take the analysis a step further, what happens after a few rounds of this? Unless you’re willing to let the private sector face an unnecessary slowdown, you’ll have to find ways to continue boosting productivity in the public sector; i.e. taxes that minimize dead weight loss, privatize government enterprises etc. By privatize I only mean the funding of those enterprises; if private individuals want to voluntarily fund things like Oak Ridge National Labs, they’d be free to do so, just like they can invest in publicly traded companies.

  35. Gravatar of OGT OGT
    20. October 2011 at 08:52

    Scott, many congratulations.

    Also this is an excellent post on your views on inflation, which I hadn’t really understood before. I certainly agree that our measures our problematic.

    I still think inflation is something ‘real.’ It certainly appears real in many historical cases like Weimar Germany or post-black death England, or deflation in the GD.

    And of course, many of our economic measures are problematic, including productivity measures or even GDP. But, I suppose we do have to use something.

  36. Gravatar of Rafael Rafael
    20. October 2011 at 08:53

    ooops I meant “feel to beat Krugman?”

  37. Gravatar of Gabe Gabe
    20. October 2011 at 08:58

    Do you guys really think we humans who place some value of free markets should regard public sector GDP growth as being equal in value to private sector GDP growth?

    I think target Nominal Private Sector GDP would be an improvement over merely targeting NGDP. Does Sumner agree or is that too libertarian for him?

  38. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. October 2011 at 09:39

    The next question should be, when do the overlords at Bentley realize that Scott is more valuable blogging than grading papers?

    Especially now that Krugman has conceded that the real action is now in the econosphere.

  39. Gravatar of Traction | feed on my links Traction | feed on my links
    20. October 2011 at 09:48

    [...] Here is another Sumner Summary. [...]

  40. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. October 2011 at 09:49

    ‘“Bob, what do you do if you’re on path but you have seven percent inflation and minus one percent on output? Ease policy or tighten it?”’

    Wouldn’t the answer be, ‘Do neither.’?

  41. Gravatar of Eric Morey Eric Morey
    20. October 2011 at 10:17

    I’m talking about historical long term RGDP trend and you reply with:
    “When we are suddenly touching the “rates rates” moment, at that moment, we don’t have t raise rates IF we cut public employees.”

    WTF?

    I have no political point. Just a recognition that historical data makes 2008 “magical” compared to other dates, because it is when we went significantly off trend.

    If the goal is to target NDGP such that the historical long term RGDP trend is projected forward indefinitely then using a 3% target growth rate and 2008 NGDP as a baseline to set your level target will create a NGDP level target that will tend to cause RGDP to under perform against historical long term RGDP trend.

    Honestly, I often have trouble recognizing whether you even have any point in most of your posts, beyond being motivated by a “I want mine, so screw you” mentality and ranting about the best way forward politically for yourself. It is a shame that you don’t simply explain you thoughts on economics instead of posting all of your political rubbish. I’m here to learn and think about economic theory, not to push a political agenda.

  42. Gravatar of Morgan Warstler Morgan Warstler
    20. October 2011 at 10:23

    “To take the analysis a step further, what happens after a few rounds of this? Unless you’re willing to let the private sector face an unnecessary slowdown, you’ll have to find ways to continue boosting productivity in the public sector”

    We should expect 3-5% productivity gains in the public sector for the next 20 years.

    GOV2.0: there’s a app for that.

    If you want to know HOW to align everyone’s interests you simply cap public employee compensation and only offer wage increases based on headcount reductions.

    Suddenly public employees are begging Internet start up guys to come in solve problems.

    That’s the real answer, everything that that we have done to the private sector since 1994 WILL be allowed (and cheered) to happen in the public sector.

    But you’ve really be honest about it. And the left is going to be forced to be honest about it.

    It took just a few months from Wisconsin gutting public employees and suddenly school districts had budget surpluses.

    That’s a “touch the button, get a piece of crack” kind of experience.

    In Texas, Perry’s got the EDU folks forced into creating a $40K and done college degree.

    Shutting down the Post Office will force old people to learn to use the Internet… or be cut off from benefits. That one change alone, helps take a big bite out of the cost of care for Seniors.

    I did an basic web2.0 approach to the SSA here:

    http://biggovernment.com/mwarstler/2010/05/05/gov2-0-witold-skwierczynski-must-die/

    That stats on those idiots are mind-boggling.

    Like half the calls don’t get answered.
    The vast majority of the calls are ” where’s my check?”
    But only 17% of SS recipients still get checks!

    When public employees can’t get raises unless they fire Bob, everything I said above suddenly becomes gospel.

  43. Gravatar of Morgan Warstler Morgan Warstler
    20. October 2011 at 10:32

    Eric,

    I don’t have a I got mine agenda, I have a SMB agenda. I want to favor SMBs over the oligarchs that run the Fortune 1000.

    “Just a recognition that historical data makes 2008 “magical” compared to other dates, because it is when we went significantly off trend.”

    Look, you aren’t being logical.

    Scott says that IF we had been targeting NDGP in 2008, then the Fed wouldn’t have tightened.

    You agree with that right?

    Well if the fed was level targeting in 2008, they would have been doing it in 2005, 2006 etc.

    So 2008 wouldn’t have happened.

    I run numbers that say that if they had been doing it from say 1999, or hell go back to 1940.

    You want to say 2008 was the trend, I want you to admit 2008 was above trend.

    And I want you to ADMIT that if a giant housing bubble can’t put 2008 above trend, then you really aren’t playing fair.

  44. Gravatar of o. nate o. nate
    20. October 2011 at 10:41

    Another advantage of NGDP targeting is that it replaces a dual mandate with a single mandate. Dual mandates are tough because you are often faced with trade-offs. We have seen that when faced with the trade-off between maximum employment and price stability that the Fed has tended to err on the side of price stability. Having a single mandate would dispel that moral quandary and make the Fed more purely technocratic in its mission. The NGDP is a measure that incorporates both aspects of the current dual mandate and naturally tends to strike a balance between them.

  45. Gravatar of Benjamin Cole Benjamin Cole
    20. October 2011 at 10:43

    Ben Crain: I have fought lonely battles for English as well. But—language evolves. Did you know that Strunk & White is in disrepute in some circles?

    How about this rousing battle cry: “My fellow citizens, my fellow patriots, let us go down to the ramparts, and show ‘em what were made of!”

    Oh, excuse me. Let’s show them of what we are made.

    A favorite word of mine was “peruse.” It was misused so much it now has two and opposite meanings in the dictionary.

    In the ned, language evolves, and old standards fade away. The word “awful” has been replaced by “awesome.” “Awful” used to mean “awesome.”

    Relax, and enjoy the best econoblog anywhere and please join the Market Monetarism movement until Bernanke signs on board.

  46. Gravatar of W. Peden W. Peden
    20. October 2011 at 10:45

    Russell Jones also proposed a monetarist-style NGDP targeting approach with long-term targets similar to k% targeting in 1985. Unfortunately, he combined this proposal with an incomes policy, which was apparentely essential if UK unemployment was going to start falling significantly again (it fell rapidly from 1986-1988).

    Samuel Brittan was an even earlier British fan of NGDP targeting (and, at some point, basically almost every significant macroeconomic policy ever).

  47. Gravatar of Morgan Warstler Morgan Warstler
    20. October 2011 at 11:13

    http://www.washingtonpost.com/blogs/ezra-klein/post/ngdp-targeting-the-hot-new-monetary-craze-that-just-might-end-the-downturn/2011/10/20/gIQA4Kxh0L_blog.html

  48. Gravatar of ChacoKevy ChacoKevy
    20. October 2011 at 11:27

    I saw that too, Morgan.

    There’s got to be a more efficient way to bring attention to certain links, as I’m willing to bet that all of us here probably have upwards of 90% coincidence of subscriptions on our RSS feeds.

  49. Gravatar of JimP JimP
    20. October 2011 at 11:34

    I didn’t see it till it came here.

    I wonder if this will really happen.

    Obama should talk about this – he should push this. He might just get re-elected if he does. That idiotic jobs bill he is pushing won’t do at all.

  50. Gravatar of JimP JimP
    20. October 2011 at 11:41

    And if Obama is re-elected we can all rejoice. Not.

    We need tax and spending reform – and he is not interested.

  51. Gravatar of Morgan Warstler Morgan Warstler
    20. October 2011 at 11:57

    Already Goldman is at 4.5%

    I’m telling you guys the way this gets done politically has nothing to do with Obama. The way it gets done politically is at (4% or less) because of the promise:

    1. how quickly we raise rates.
    2. “if we get 3% (or 4%) RGDP, that’s ZERO inflation!”
    3. historically it explains when the Fed failed.
    4. it weakens the fed.

    Even if you guys REALLY want some immediate inflation, you ought to be talking exclusively about the stuff that the Tea Party wants.

  52. Gravatar of Eric Morey Eric Morey
    20. October 2011 at 12:08

    Morgan,

    “You want to say 2008 was the trend, I want you to admit 2008 was above trend.”

    I specifically said that 2008 is ‘is when we went significantly off trend’. You even quoted it. Looking at RGDP data in the graphs I linked to previously, 2008 was *below* trend.

    “Scott says that IF we had been targeting NDGP in 2008, then the Fed wouldn’t have tightened. You agree with that right?”

    Agreed.

    “Well if the fed was level targeting in 2008, they would have been doing it in 2005, 2006 etc.”

    Non-sequitor. Level targeting in 2008 does not imply the same in prior years. The Fed could have started level targeting in any year since 1913.

    “So 2008 wouldn’t have happened.”

    It is likely that things would have been significantly different and for the better if the Fed was level targeting from some point prior to 2009 to present, yes.

    “I want you to ADMIT that if a giant housing bubble can’t put 2008 above trend, then you really aren’t playing fair.”

    I’m not sure what you are saying here. I won’t bother to venture a guess.

    “I run numbers that say that if they had been doing it from say 1999, or hell go back to 1940.”

    And what did you find? Did you post your analysis, reasoning and conclusions in some central location, your blog perhaps?

    “I don’t have a I got mine agenda”

    I said ‘I want mine agenda’; your comments on how “poor people don’t matter”(direct quote) and ‘people like you deserve fire sale prices’(paraphrased) as a basis of a political ideology seem to support my claim. But that is not important to the economic data and the analysis of potential NGDP level targets.

  53. Gravatar of Morgan Warstler Morgan Warstler
    20. October 2011 at 12:39

    http://www.thestreet.com/story/11282562/1/the-most-important-ben-bernanke-speech-that-no-one-heard.html

    Eric, if you try to convince yourself that Monetary Policy is a function of Democracy, you will be forever and ever sadly disappointed.

    I just admit it isn’t. Do so helps to:

    1. figure out how to convince the decision makers.
    2. convince the decision makers.

    “It is likely that things would have been significantly different and for the better if the Fed was level targeting from some point prior to 2009 to present, yes.”

    Point granted. Everything else I say flows from there.

    THAT is the most convincing argument to the people who have jobs, have savings… you know, the ones that matter.

    And getting you (and other here) to say it, like Cthorm finally with the choice between private and public sector growth…

    Has been impossible.

    Its like you don’t want to have to admit you’re going to have to plead your case with Tea Party.

    In order to get anything done in life, you have to find out first who to ask, and then you figure out how to ask them.

  54. Gravatar of JimP JimP
    20. October 2011 at 13:57

    http://www.businessinsider.com/bernanke-no-more-stimulating-from-me-2011-10

    And Ben says no – won’t do it. And that is that.

  55. Gravatar of Morgan Warstler Morgan Warstler
    20. October 2011 at 14:27

    “Federal Reserve Chairman Ben Bernanke told Senate Democrats on Thursday that they should not expect additional monetary stimulus from the Fed, putting pressure on them to pass jobs and deficit-reduction legislation.”

    Don’t worry JimP, we’re going to get level targeted NGDP, but it’s not gong to alleviate the pressure on what public employees get paid.

    The most attractive thing about level targeting is the private growth vs. public growth…

    Deregulate, lower taxes, end Davis Bacon, throw out the unions…

    We have to be very careful what we spend that 3% RGDP on!

  56. Gravatar of Expectations and commitment are monetary policy » TVHE Expectations and commitment are monetary policy » TVHE
    20. October 2011 at 14:31

    [...] Now, as readers of TVHE you have seen past this rouse, and you recognise that monetary policy is independent cyclical policy that is intended to ensure that “inflation” stays at a certain rate and that shifts in output due to “aggregate demand” are kept to a minimum.  Again, this is a simplification – but it gives us our role, something we have discussed in more detail here. [BTW, there is a good post on discussing the right practical target variable here]. [...]

  57. Gravatar of Liberal Roman Liberal Roman
    20. October 2011 at 15:27

    Wow. And Bernanke goes all in on idiocy. Goodbye economy.

  58. Gravatar of JimP JimP
    20. October 2011 at 15:50

    Or maybe yes.

    http://www.businessinsider.com/fed-governor-speech-tarullo-mortgage-buying-2011-10

  59. Gravatar of Declan Declan
    20. October 2011 at 16:33

    Good stuff (and congrats on finally getting through to Krugman).

    On point 7, I would say that lack of comprehensive coverage of wages isn’t necessarily a problem: the Mankiw & Reis paper argues for targeting prices with a small share in the CPI.

    But I would also worry that if we explicitly target x% wages growth, x would become the new zero for downward nominal rigidity.

    Maybe the ideal is to target wages but lie about it. Unfortunately that works less well with level than inflation targeting!

  60. Gravatar of JimP JimP
    20. October 2011 at 17:14

    What ZeroHedge says about NGDP targeting:

    “Look for Bill to have bought much more MBS when the October TRF update is released. The good thing out of all this: Jan Hatzius can finally shut up about Nominal GDP targetting, a topic so stupid we have been ignoring it on purpose. Instead, the Goldman economist can now redouble his efforts on pitching MBS monetization as the one greatest thing to save Goldman bonuses for 2012 (2011 is a screatch), er… we mean, tax-break for the middle class.”

    An ever-charming website – as always.

  61. Gravatar of John John
    20. October 2011 at 17:27

    Gave,

    Sumner says a private measure target like Rothbard’s Gross Private Product would cause the economy to over heat. Weak sauce I say. I think it might be nice if governments were dissuaded from war and big spending.

    Scott,

    Why does macro use P and Y at all? There’s no way to measure output except by adding up prices and no way to measure the price level except by finding the prices of output. The two variables are defined in terms of eachother and are therefore unscientific.

  62. Gravatar of Liberal Roman Liberal Roman
    20. October 2011 at 17:33

    Oh man. Zero Hedge has you in his cross hairs. Prepare for some very personal attacks.

  63. Gravatar of Eric Morey Eric Morey
    20. October 2011 at 19:09

    Morgan,

    “Eric, if you try to convince yourself that Monetary Policy is a function of Democracy, you will be forever and ever sadly disappointed.”

    WTF does this have anything to do with what I wrote or asked you?

    “In order to get anything done in life, you have to find out first who to ask, and then you figure out how to ask them.”

    Obviously, you are not trying to convince me of anything or you are piss poor at making a convincing argument.

    Repeat:
    “I run numbers that say that if they had been doing it from say 1999, or hell go back to 1940.”

    And what did you find? Did you post your analysis, reasoning and conclusions in some central location, your blog perhaps?

  64. Gravatar of Morgan Warstler Morgan Warstler
    20. October 2011 at 20:30

    Eric, why are you sweating this?

    “Historically, from 1947 until 2011 the United States’ average quarterly GDP Growth was 3.28 percent reaching an historical high of 17.20 percent in March of 1950 and a record low of -10.40 percent in March of 1958.”

    http://webcache.googleusercontent.com/search?q=cache:SFIh_kryBRwJ:www.tradingeconomics.com/Economics/GDP-Growth.aspx+%25+rgdp+historical&cd=3&hl=en&ct=clnk&gl=us&client=firefox-a

    I don’t know why you keep pretending you are making some argument about stats and models.

    Scott uses 5% as he see 3% RDGP as historical and 2% inflation as what the Fed tries to target.

    My point is that we have actually run up over 3% more often than not, and inflation has been over 2%, so at 5%, we’re still talking about historically harder money than we have had.

    NEXT POINT, Goldman is saying 4.5% based on the idea that the assumption of 2.5% RDGP is the new 3%.

    Which helps make my point, the Fed is after opportunistic dis-inflation, so 1.5% is the new 2%.

    So now we’re at 4% NGDP (2.5% + 1.5%), which leaves us open to the question from Friedman…

    What if we target 4% and we get 6% inflation and -2% RGDP.

    So hey wait, WHY NOT do 3% NGDP level target??

    Now we’re basically promising the Tea Party that if we just get the historical average of 3%, our fed will be delivering ZERO INFLATION.

    Woolsey likes 3%, he wants to go back to 2008, but as I keep saying and you skip right over.

    IF the mortgage lending crisis run-up before 2008 doesn’t count as being “too hot” – then you are crazy.

    And SINCE the run up was too hot, we shouldn’t use 2008 (the peak) as our jump off point.

    Even Scott admits, we’re never go to go back and make it all up.

    This just looks like to me how this whole thing plays out. And I cheer for it!

    So if you think my narrative is off, my logic is faulty, tell me why, but stop pretending I’m not making a real argument.

  65. Gravatar of Morgan Warstler Morgan Warstler
    20. October 2011 at 20:48

    Eric, look at this:

    http://www.data360.org/dsg.aspx?Data_Set_Group_Id=354

    Two things:

    1. That is a downslope.
    2. If we had been using Scott’s 5% NGDP since 194, it’d be like we never left the gold standard.

  66. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. October 2011 at 22:26

    Scott wrote:
    “Message to any smart grad students reading this blog: I’m providing the intuition—I’m counting on you to turn it into a rigorous mathematical model that my peers will take seriously.”

    Although it’s a major departure from my supply side research, it’s been a major focus of mine since the crisis began, and since the day I discovered your blog.

    Believe me I, for one, am totally on it.

    Thanks.

  67. Gravatar of Lorenzo from Oz Lorenzo from Oz
    20. October 2011 at 22:47

    I would just like to add my congratulations Scott: I have learnt an enormous amount reading your blog and being led to reading so many excellent like-minded blogs.

    I have been doing my bit to spread the word.

  68. Gravatar of Ram Ram
    21. October 2011 at 03:16

    In my view, nominal GDP level targeting is as New Keynesian as monetary policy regimes come. The usual case for inflation targeting is that it anchors inflation expectations in such a way that movements in nominal interest rates induce equally large movements in real interest rates. The shortfall in aggregate demand is determined by the spread between the actual rate of interest and the “natural” rate of interest; thus inflation targeting permits the central bank to lower/raise its policy rate (a benchmark nominal interest rate) in order to reduce/increase that spread as needed to keep AD on target.

    The problems with inflation targeting are: (1) If the “natural” rate of interest is highly negative, due to a large negative AD shock, the zero lower bound on the CB’s policy rate prevents it from reducing that spread sufficiently. In that case, a temporarily higher inflation target would do the trick, making a price level target preferable, as it automatically raises the inflation target temporarily when the CB is constrained by the ZLB, while keeping longer-term inflation expectations well-anchored. (2) If the economy is buffeted by a large negative aggregate supply shock, then both price level and inflation targeting call for a higher setting of the policy rate, which would be inappropriate as the CB cannot do anything to mitigate the effects of such a shock, but can make things worse. This makes a flexible price level target preferable, as it responds to a rise in the output gap by calling for a lower setting of the policy rate. This would cancel out the contractionary implications of the inflation blip associated with the AS shock.

    The trouble is that estimating the output gap is a tricky business. Assuming potential output grows at a stable rate, a nominal GDP level target behaves just like a flexible price level target, but keeps it simple, facilitating expectations management, and making it unnecessary to estimate the output gap. Moreover, nominal GDP is a pretty good measure of AD itself, which is really what we care about at the end of the day. Finally, the most stable period in the macroeconomic data, the Great Moderation, was characterized by a stable growth path for nominal GDP, which the present crisis sharply deviated from. Thus,

  69. Gravatar of Ram Ram
    21. October 2011 at 03:24

    In my view, nominal GDP level targeting is as New Keynesian as monetary policy regimes come. The usual case for inflation targeting is that it anchors inflation expectations in such a way that movements in nominal interest rates induce equally large movements in real interest rates. The shortfall in aggregate demand is determined by the spread between the actual rate of interest and the “natural” rate of interest; thus inflation targeting permits the central bank to lower/raise its policy rate (a benchmark nominal interest rate) in order to reduce/increase that spread as needed to keep AD on target.

    The problems with inflation targeting are: (1) If the “natural” rate of interest is highly negative, due to a large negative AD shock, the zero lower bound on the CB’s policy rate prevents it from reducing that spread sufficiently. In that case, a temporarily higher inflation target would do the trick, making a price level target preferable, as it automatically raises the inflation target temporarily when the CB is constrained by the ZLB, while keeping longer-term inflation expectations well-anchored. (2) If the economy is buffeted by a large negative aggregate supply shock, then both price level and inflation targeting call for a higher setting of the policy rate, which would be inappropriate as the CB cannot do anything to mitigate the effects of such a shock, but can make things worse. This makes a flexible price level target preferable, as it responds to a rise in the output gap by calling for a lower setting of the policy rate. This would cancel out the contractionary implications of the inflation blip associated with the AS shock.

    The trouble is that estimating the output gap is a tricky business. Assuming potential output grows at a stable rate, a nominal GDP level target behaves just like a flexible price level target, but keeps it simple, facilitating expectations management, and making it unnecessary to estimate the output gap. Moreover, nominal GDP is a pretty good measure of AD itself, which is really what we care about at the end of the day. Finally, the most stable period in the macroeconomic data, the Great Moderation, was characterized by a stable growth path for nominal GDP, which the present crisis sharply deviated from. Thus, a nominal GDP level target is really the most natural monetary policy regime for a New Keynesian to favor. Indeed, the most influential paper on NK theory, Clarida, Gali, and Gertler () considers a form of nominal GDP targeting, questioning it mostly on narrow pragmatic grounds on which, in my view, inflation targeting does not fare much better. So I’m surprised it has taken a pretty conventional NKer like Krugman to take this proposal seriously.

  70. Gravatar of Ram Ram
    21. October 2011 at 03:26

    I apologize for the double posting, I’m writing from my smartphone.

  71. Gravatar of Ram Ram
    21. October 2011 at 03:37

    The Clarida, Gali, and Gertler paper is called “The Science of Monetary Policy: A New Keynesian Perspective”, for anyone who may be interested. I believe it was publishe in 1999 or 2000 in the QJE.

  72. Gravatar of StatsGuy StatsGuy
    21. October 2011 at 04:21

    JimP (from ZH):

    “Jan Hatzius can finally shut up about Nominal GDP targetting, a topic so stupid we have been ignoring it on purpose.”

    Translation:

    “We hope that satisfies Goldman and they drop NGDP targeting, an idea that might actually work and thus reduce the insane volatility and social self-destruction that we crave.”

  73. Gravatar of Skanda Skanda
    21. October 2011 at 06:51

    I thought this news might please you. I had the chance to ask Governor Dan Tarullo before and after his big speech yesterday a few questions. After his speech, he took some q&a from Columbia students who attended, where I asked him if he had any thoughts on level targeting (whether price or nominal gdp) and while he punted on stating a position on a specific policy, he said he was very interested in the idea of level targeting, particularly nominal gdp targeting, but that he needed to look at more analysis first. He said the Fed would be exploring alternatives to what he called a “flexible inflation target” in the upcoming meetings. That’s kinda sorta good news…right?

  74. Gravatar of johnleemk johnleemk
    21. October 2011 at 09:37

    Obama has been writing cheques to impoverished Americans, despairing that there’s nothing else he can do to help them: http://www.huffingtonpost.com/2011/10/21/obama-personal-checks_n_1019501.html

    Ordinarily I agree presidents don’t have much power, good or bad, over the economy. But appoint some market monetarist Fed governors, for pete’s sake!

  75. Gravatar of flow5 flow5
    21. October 2011 at 09:55

    The FED always covers up their errors. Their propaganda is comprehensive:

    These broader series grew more steadily both before and during the crisis. Although the evidence is mixed, the MSI overall suggest that monetary policy was accommodative before the financial crisis when judged in terms of liquidity. —Richard G. Anderson and Barry Jones

    This is of course a lie. Nominal gDp collapsed. Money flows collapsed. The Monetary Service Indexes (MSI) obviously do not represent “money” nor “money flows”.

  76. Gravatar of W. Peden W. Peden
    21. October 2011 at 10:43

    Flow5,

    You can always find some statistic (perhaps a very ridiculous one) that suggests that economic policy was either X or not X. As you say, this use of MSI is exactly that kind of ridiculous statistic.

  77. Gravatar of Gabe Gabe
    21. October 2011 at 11:26

    “You can always find some statistic (perhaps a very ridiculous one) that suggests that economic policy was either X or not X.”

    and this is a loyal promoter of the great value of empirical analysis?

    how can you so easily scoff at other forms of analysis when you talk like this?

  78. Gravatar of Fed Up Fed Up
    21. October 2011 at 11:31

    PATCO (air traffic controllers strike)

    http://rortybomb.wordpress.com/2011/03/18/the-federal-reserve-unions-wage-stagnation-and-risk-shifted-jobs/

    http://www.irle.berkeley.edu/events/fall05/seminars/mitchell/mitchell_notyetdead.pdf

    On p.5,

    “But despite monetarist sentiments, in a pragmatic way monetary policy makers at the Fed were more likely than administration economists to use visible union wage settlements as a proxy for success in achieving disinflation. Wage-push seemed to live on at the FOMC, albeit hidden from public view.

    Fed Chair Volcker apparently regarded the outcome of union negotiations as especially significant from a macro viewpoint. To Volcker, the foiled Professional Air Traffic Controllers Organization (PATCO) strike – in which President Reagan fired and replaced the strikers – was a blow to inflation. He saw a direct impact on subsequent wage setting and inflationary expectations. According to Volcker, “The significance (of PATCO) was that someone finally took on an aggressive, well-organized union and said no.” Volcker regarded the PATCO outcome as having “a psychological effect on the strength of the union bargaining position on other issues – whatever the issues were.” (Neikirk 1987, p. 110)

    In short, Volcker viewed affecting union wage determination through monetary restraint as important for the Fed’s disinflation campaign. One commentator characterized the Fed chair’s view as founded on the idea that “inflation would not be securely defeated…until all those workers and their unions agreed to accept less. If they were not impressed by words, perhaps the liquidation of several million more jobs would convince them.” (Grieder 1987, quote on p. 431; discussion on pp. 429-431) Others at the Fed apparently had similar wage-push ideas. (Grieder 1987, p. 454)

    To Volcker, direct intervention in particular wage settlements was not desirable (and clearly not the province of the Fed). But a monetary squeeze that forced the union sector to hold down nominal wages in the hopes of preserving jobs was an appropriate policy instrument. Squeeze the unions and other wages (and prices) would fall into line. Below we document Fed policy during the period 1981-1992 under Volcker and, later, Alan Greenspan. We show how analysis of union settlements figured in policy discussions at the FOMC. Then we move to the Clinton era during which the focus on union settlements was reduced, but still persisted.”

    http://rortybomb.wordpress.com/2011/03/18/the-federal-reserve-unions-wage-stagnation-and-risk-shifted-jobs/

    “Here’s a question I’ve been trying to find research on lately – how much is the post-Volcker era of monetary policy responsible for stagnating wages and high-end inequality? I’m pretty familiar with the stories and arguments surrounding these two topics, and the Federal Reserve never shows up. It’s almost like taking an American phone charger overseas; there’s no place for monetary policy to “plug-in” the current research and arguments, from technology to superstars to policy to everything else, on wages/inequality. Which is weird, since when you read transcripts of their FOMC meetings, released years after the time when they were recorded, the board members are obsessed with wages. We have a sense of the Greenspan Put for the financial sector, but what’s the Greenspan option-metaphor for workers?”

    And, “Last but not least, August 1997, when the Fed is pissed about the UPS strike that was finishing up:

    MR. MCTEER Now that the UPS strike is apparently over, there is nothing obvious on the horizon to spoil the party, although I suspect we will find that the strike has done a good deal of damage in the past couple of weeks. The settlement may go a long way toward undermining the wage flexibility that we started to get in labor markets with the air traffic controllers’ strike back in the early 1980s. Even before this strike, it appeared that the secular decline in real wages was over, although productivity gains appeared to be sufficient to keep unit labor costs under good control.

    GREENSPAN It may well be that the real significance of the UPS strike is that we are beginning to see a reversal of what had been a dramatic development: The air traffic controllers’ confrontation with President Reagan set in motion a fundamental change in policy for this country more than 15 years ago. It is conceivable that we will look back at the UPS strike and say that it too signaled a significant change.

    “A good deal of damage.” I would not say, even at the time, that the UPS strike signaled a change towards stronger unions. But even the possibility of it sent the Federal Reserve board up the wall, as if unions were one more strike away from dominating the labor economy, and they were checking out what bazookas they could get on the table.

    Read the transcripts, if wages were increasing significantly over this time period some of the most powerful people in the country would feel as if they failed in their job. So my question is legitimate: Who is studying if this had an impact on stagnating wages? How would they go about studying? What are the falsifiable hypotheses? What are the mechanisms – can the Fed create an expectation for employers of stagnant wages?”

    I believe that is bob “if we just hold hands and buy an SUV in 2001, everything will be OK” mcteer and alan “I like it when rich republicans and rich democrats call me the greatest central banker ever to appease my ego” greenspan.

  79. Gravatar of W. Peden W. Peden
    21. October 2011 at 11:55

    Gabe,

    “and this is a loyal promoter of the great value of empirical analysis?”

    Yes? I think that statistics are misused in all kinds of fields; it doesn’t mean that I’m opposed to empirical inquiry in them.

    “how can you so easily scoff at other forms of analysis when you talk like this?”

    I don’t easily scoff at them, so I don’t know the answer to this question.

  80. Gravatar of Fed Up Fed Up
    21. October 2011 at 11:58

    Here is a graph of average hourly earnings (AHETPI) vs. effective fed funds rate (FEDFUNDS) from the St. Louis Fred assuming I did it correctly.

    http://research.stlouisfed.org/fred2/graph/?g=2UN

    I chose the middle of 1985 for the FEDFUNDS so the graph is easier to see.

    “Set monetary policy to keep average hourly wages growing at a steady rate of 4%, and we’ll be OK.”

    Snicker, snicker. I don’t think you are on the same page as the fed.

    “So why don’t I favor a wage target? I’m not sure how comprehensive the wage data actually is, and I also don’t think it’s politically feasible to target wages. It would seem too much like the Fed is trying to hold down wages, which seems unfair. (Even though in theory CEO incomes are also “wages.”)”

    It seems to me the fed is targeting the wages of the lower and middle class. If you are going to say and do one thing when actually trying to accomplish something else, you should be a politician (that’s the nice way of saying it).

    The other thing to consider is productivity growth. If by some miracle productivity started growing 10% per year, is 4% wage growth per year too low?

  81. Gravatar of Gabe Gabe
    21. October 2011 at 12:23

    ok guys congrats NGDP targeting talk is on the rise. I am afraid that some here are misguided if they think that it is “conservatives” or republicans holding them back. It seems to me that you will need to focus some attention on the BIS.

    What exactly is the BIS? it was established in 1930 initially but underwent changes throughout the 1930s and even after World War II as well. David Rockefeller was apparently intimately involved with the BIS and its workings as he and his family were, as well, with the creation of the IMF, the World Bank and of course the UN, for which they donated land.

    For this reason, as well, the BIS often sends out defensive press releases to ensure that its leadership looks responsible and concerned about the various distortive impacts of money printing. One such release (as part of its annual report) was issued back in June 2011 and summarized by The Australian. Here is part of the article:

    “Age of cheap money must end, warns Bank of International Settlements … Rising labour costs in emerging countries threaten to set off a global inflationary spiral similar to the one triggered by escalating food prices in the 1970s, the Bank for International Settlements warned today. “Against this backdrop, central banks must remain highly alert to a build-up of inflationary pressures,” the bank said in its annual report.

    Central banks should stay tough against price rises even if this approach would seem to be incongruous with conventional estimates of slack in the domestic economy and price trends, the bank said. “All in all, still we continue to see that monetary policy is too accommodative,” but “it doesn’t mean we call for raising rates in each country,” BIS general manager Jaime Caruana said in response to a journalist’s question at a brief media conference concluding the bank’s annual general meeting …

    Though the situation is different from that in the 1970s, monetary policymakers may confront challenges similar to that era of spiraling prices, the BIS wrote … The bank also cautioned advanced economies against prolonging the loose monetary policy many deployed during the financial crisis, saying this likely has been an important factor in recent “large capital flows to emerging market economies.”

    This is real power speaking…don’t blame tight monetery policy on weak puppets like Rick Perry…look at the real power that most here won’t even admit exists.

  82. Gravatar of Charles Charles
    22. October 2011 at 05:53

    Some thoughts from a voice in the crowd

    http://www.youtube.com/watch?v=huzEXoDj4RM&feature=related

    http://www.youtube.com/watch?v=TvQU6r3cZaI&feature=related

  83. Gravatar of Doc Merlin Doc Merlin
    22. October 2011 at 06:33

    +1 on what you said about inflation.

    On the price level front, I would also add that we can compare like with like and use raw materials prices.

    “Older rental contracts aren’t really prices at all; they are a sort of nominal debt.”

    - I agree!
    Also, I don’t think models or economists really understand the incredible importance of nominal debt.

  84. Gravatar of flow5 flow5
    22. October 2011 at 06:53

    “and this is a loyal promoter of the great value of empirical analysis?”

    MSI double oounts some measures of the money stock. Therefore it overstates AD. It is thus propaganda & provides evidence to the contrary about targeting nominal gDp. It is as convienent as “A Reconstruction of the Federal Reserve Bank of St. Louis Adjusted Monetary Base and Reserves” which deliberately mis-calculates numbers to show that Volcker’s inflation policies tamed inflation (by the same economist).

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  86. Gravatar of Larry Larry
    22. October 2011 at 17:52

    How well could market monetarism protect the US from the coming “credit event” in Europe? Could MM protect Europe from looming doom?

  87. Gravatar of Fed Up Fed Up
    22. October 2011 at 20:32

    Doc Merlin said: “Also, I don’t think models or economists really understand the incredible importance of nominal debt.”

    I agree. IMO, they don’t understand debt in terms of medium of exchange, time, and how more and more debt can be destabilizing instead of stabilizing.

    They also can’t seem to understand the concept of an economy going from mostly aggregate supply constrained to aggregate demand constrained.

  88. Gravatar of dwb dwb
    23. October 2011 at 04:50

    in a bizzarre, backhanded, and strange way, Kocherlakota has basically endorsed Evan’s approach of keeping rates low based on the evolution of UE and inflation. He even gives a nod thatprivate sector inflation forecasts are a lot lower than his.

    What I do see as problematic is that the Committee’s resolution of this trade-off appears to be changing over time…. First, the FOMC should explain how it plans to resolve the trade-off between inflation and unemployment in making its future decisions… Here, I believe that the use of metrics like the mandate dashboard provides a useful form of discipline—both on our own actions and on the public’s understanding of those actions

    http://www.chicagotribune.com/business/breaking/chi-feds-kocherlakota-says-he-likes-evans-approach-20111021,0,477679.story

    http://www.minneapolisfed.org/news_events/pres/speech_display.cfm?id=4770

  89. Gravatar of StatsGuy StatsGuy
    23. October 2011 at 05:25

    Doc Merlin said: “Also, I don’t think models or economists really understand the incredible importance of nominal debt.”

    Doc, the truth of the matter is that most models don’t really distinguish between debt/credit and money. What seems to matter is the rate of credit creation, and as such the models only care about the flow, not the total stock.

    I have yet to hear what, specifically, separates privately created money (private debt) from publicly printed money, and specifically why this is important. I have my own ideas, and some thoughts about why economics is so keen on not answering this question.

  90. Gravatar of flow5 flow5
    23. October 2011 at 05:48

    “Deficit” is simply the term for current debt accumulation, & credit is the obverse of debt. Deficits can be good, bad, or indifferent. For all we know, that credit, properly used, is the “life blood” of a healthy economy.

    Any given deficit should be evaluated in terms of 1) the size of the deficit in the context of the size of future deficits, and the accumulated debt relative to the means and costs of financing the whole; 2) how the deficit is financed; a. from savings or, b. commercial bank credit, i.e., newly created money; and 3) the purpose for which the deficits are incurred.

    Prorating the federal deficits over the entire spectrum of federal expenditures, it can be said that virtually all of the current deficits are attributable to defense spending, military and civil service pensions, interest on the debt, and welfare and unemployment benefits. Social security is not included in the above list since only a very small proportion of social security benefits are financed from nonsocial security taxes. From an economic standpoint, only interest is “untouchable”.

    Debt incurred to finance transfer payments (interest, pensions, etc.) is of dubious quality.. Any enterprise, private or public, is in dire straits if it has borrowed in order to make such payments.

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  92. Gravatar of Morgan Warstler Morgan Warstler
    23. October 2011 at 11:12

    Eveentually the arguments get made that lead to my stoppers.

    Matty is finally dragging himself over the line… why o’ why does it take folks so long???

    http://thinkprogress.org/yglesias/2011/10/22/350867/pringles-and-monetary-policy/

    “Most of the time you can’t solve economic problems by printing up free money and handing it out and people know that. So Very Serious People fear that if do solve an economic problem with the printing of free money that the public’s appetite will become insatiable. The conventional wisdom seems to be that something like this (rather than the more parsimonious “Richard Nixon was a bad president”) theory explains the Great Inflation of the 1970s. On the fiscal side, I generally think that similar Pringles Logic rather than some more nefarious conspiracy explains a lot of the behavior of Ari Berman’s austerity people. VSPs don’t think the public can handle the message that sometimes deficits matter a lot and sometimes they don’t matter at all and sometimes they ought to be larger.”

    Matty STILL doesn’t quite get the futility of edging ever closer to the other side in a argument.

    To WIN you have to really see the world as it is.

    Very Serious People KNOW that money, monetary theory, and government itself are not just servants of the “American People”

    On the voting side it is only “likely voters” that matter.

    And on the economic side the decision makers are the people who OWN, MAKE, INVENT, INVEST, etc.

    It is not a small percentage of people. Politically, it’s about 80M (probably a little less). And Economically, it’s about the top 30% of earners.

    If you don’t ADMIT that these groups control shit, you can’t get around to figuring out how to build policy you can live with, that will CONVINCE them.

    Matty wants certain things, and he fails to get achieve those, because he doesn’t want to have to cater to those groups.

    So he’s still thinking he can commandeer monetary policy for the have-nots, and that’s just not going to happen.

  93. Gravatar of Fed Up Fed Up
    23. October 2011 at 17:08

    StatsGuy said: “I have yet to hear what, specifically, separates privately created money (private debt) from publicly printed money, …”

    Let’s rephrase that. How is/are private debt, gov’t debt, and what I define as “currency” different?

    And, “specifically why this is important. I have my own ideas, and some thoughts about why economics is so keen on not answering this question.”

    Go on. And, if an economy needs more medium of exchange, how should that happen?

  94. Gravatar of Philip Crawford Philip Crawford
    23. October 2011 at 17:51

    @StatsGuy, Loved the use of “keen” in your comment about stock and flow of debt. ;)

  95. Gravatar of Doc Merlin Doc Merlin
    24. October 2011 at 06:27

    @ StatsGuy

    Nominal debt stock is a long term fixed, future obligations (up to 30 years in many cases). When the NGDP diverts from the very long term expected growth path, this turns a nominal shock, into something that looks like a real shock, because the debt payment doesn’t also shrink along with NGDP.

    As debt payments are a large percent of the household income, this will look like a demand shock whenever NGDP drops, even if RGDP doesn’t drop! This means even if prices are perfectly flexible NGDP drops can still cause demand shocks.

    For debt, also, when the market interest rate increases, most debts’ interest rates do no not change, but its easy to refinance when the rate drops. This means that debt stock also creates asymmetric effects.

  96. Gravatar of Fed Up Fed Up
    26. October 2011 at 08:28

    About real aggregate demand (AD) NOT being UNLIMITED:

    http://econlog.econlib.org/archives/2011/10/for_the_myth_of.html

    “For the Myth of the Macroeconomy File”

    “Physical jobs are disappearing into the second economy, and I believe this effect is dwarfing the much more publicized effect of jobs disappearing to places like India and China.

    the main challenge of the economy is shifting from producing prosperity to distributing prosperity. The second economy will produce wealth no matter what we do; distributing that wealth has become the main problem. For centuries, wealth has traditionally been apportioned in the West through jobs, and jobs have always been forthcoming. When farm jobs disappeared, we still had manufacturing jobs, and when these disappeared we migrated to service jobs. With this digital transformation, this last repository of jobs is shrinking–fewer of us in the future may have white-collar business process jobs–and we face a problem.”

    “The standard view in economics is that wants are unlimited, so that in the long run as old jobs are destroyed new jobs are created. ***But will reality conform to this theory?*** Brian Arthur is suggesting that it might not. I have an article coming out in about a month at American.com that speculates along very similar lines.

    What if there are many people whose marginal product is so low that there is little social cost to their engaging in leisure rather than in work? How do we adapt to that? As Arthur puts it,

    Perhaps some new part of the economy will come forward and generate a whole new set of jobs. Perhaps we will have short workweeks and long vacations so there will be more jobs to go around. Perhaps we will have to subsidize job creation. Perhaps the very idea of a job and of being productive will change over the next two or three decades.

    I file these pieces under “Myth of the Macroeconomy” because they stress the importance of economic transformation, not aggregate demand and sticky nominal wages.”

    I believe they have left out more retirement.

  97. Gravatar of Fed Up Fed Up
    26. October 2011 at 09:14

    Doc Merlin, should that be called “sticky debt”?

  98. Gravatar of ssumner ssumner
    27. October 2011 at 17:02

    Everyone, Lack of time so I’ll skip over many comments.

    Frederico, I mean “so-called liquidity trap.” There isn’t really a “trap.”

    Fed Up. You said;

    “It seems to me this is exactly what the fed has been doing (holding down worker wages but not CEO and banker wages).”

    Not at all. A chart you provide shows that every time the Fed lets wage growth drop sharply, we get a recession. They need to stop doing that!

    You said;

    “Plus, I want a clarification because I seem to remember you wanting negative real earnings growth on workers.”

    No I think monetary stimulus would raise real incomes.

    Ben, I don’t write too good, cause I went to public skools and a public University.

    MMJ, That’s a very good question. I know longer think it wise to return to the 2008 trend line, I was just discussing Woolsey’s view. The Fed needs to tell us what the trend line is, then we can use it in the future–right now it’s anyone’s guess.

    OGT, Would it make any difference if we called it the German hyperNGDP growth?

    Gabe, No, because NGDP targeting has nothing to do with whether the public sector is producing useful output. All that matters is that it absorbs labor.

    o. nate, Or you could say it fulfills the dual mandate in a aspirational sense, with a single target that can be hit.

    John, We use P to measure living standards, i.e. happiness, otherwise it’s useless.

    Liberal Roman, Never heard of him.

    Thanks Mark and Lorenzo,

    Ram, Well put.

    Fed up, You are confusing nominal wand real wages.

    You said;

    “The other thing to consider is productivity growth. If by some miracle productivity started growing 10% per year, is 4% wage growth per year too low?”

    It’s Perfect. You’d get 6% deflation, like post-Civil War.

    Skanda, That’s hopeful.

    Gabe, The BIS is unimportant.

    Larry, You asked:

    “How well could market monetarism protect the US from the coming “credit event” in Europe? Could MM protect Europe from looming doom?”

    1. Very well. 2. No.

    dwb, Good point.

    Fed up, Wants are unlimited. We need demand.

  99. Gravatar of Fed Up Fed Up
    2. November 2011 at 20:17

    “Fed up, Wants are unlimited. We need demand.”

    No, that is your assumption.

    “It’s Perfect. You’d get 6% deflation, like post-Civil War.”

    I think you are assuming a bunch of stuff gets bought. The only products I see doing that are flash memory and solar panels. The other products I see 6% price deflation along with quantity growth of 1% (population growth) and at most 2% quantity growth for other reasons. Revenue falls, stock price goes down, the companies start removing capacity, and employment falls.

    You need to look at the chart when the fed funds rate is rising. If average hourly wages are up 2.5% to 3%, the fed is usually raising rates to cut off spending.

    ‘“Plus, I want a clarification because I seem to remember you wanting negative real earnings growth on workers.”

    No I think monetary stimulus would raise real incomes.’

    I’d say “monetary stimulus” is about getting people off unemployment so the gov’t can attempt to get the gov’t debt to GDP ratio back to “near normal”. It is NOT about redistributing towards the poor and middle class. It is about going towards capital (mostly the rich) and upper management. If nominal wages get too high or if there are attempts at real wage growth for the lower and middle class, then the fed raises interest rates to cut off spending and has the gov’t cut spending if necessary too.

    I’ll try it this way too. What you call “monetary stimulus” is about raising the real incomes of the few, but not the many. It might (but might not) get some unemployed people to the employed stage, but not to real earnings growth for the employed and newly employed based on their personal budgets. Almost all macroeconomists are terrible at this. They think as long as there is not too much price inflation and real GDP is growing that there are no imbalances building up. They ignore wealth/income inequality and debt. I believe that is what Minsky was talking about (or at least my interpretation).

  100. Gravatar of Scott Sumner Scott Sumner
    5. November 2011 at 12:56

    Fed up, I just addressed your points over at the “Supply shocks and NGDP targeting” post.

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